Defending livelihood and due process from illegitimate in-house prosecution

Frank Black has come a long way from his humble beginnings in Rock Hill, South Carolina, where he and his six siblings grew up. His dad passed away when he was 12. He served four years in the U.S. Navy. He then moved to Michigan and worked in car factories to put himself through college, where he became enthralled with the finance industry.

Frank landed his first job in 1971 at Merrill Lynch, and after stints at a handful of other national firms, he retired in 1997 and started Southeast Investments (SEI), a Charlotte, North Carolina-based securities broker-dealer.

Unfortunately, a quasi-governmental nonprofit, with its unjust, in-house prosecution of Frank and his company, could write a devastating final chapter to this true American success story. Both SEI and Frank are required to register with the U.S. Securities and Exchange Commission (SEC) and its attendant regulatory arm, the Financial Industry Regulatory Authority (FINRA). Formed as a private nonprofit corporation in 2007, FINRA is run by a 22-member board of governors and has a nationwide staff of nearly 4,000. Tasked with enforcing the Securities Exchange Act and federal securities regulations, FINRA is also empowered to write and enact its own binding rules and enforce those rules against the public and against its members with crushing civil sanctions. In 2012, armed with a branch office inspection rule, the quasi-government agency set its sights on SEI.

One of FINRA’s rules requires firms to closely monitor their registered representatives who manage clients’ investments. Company principals must supervise and inspect offices once every three years. Between 2010 and 2015, SEI had anywhere between 114 and 133 registered representatives, all of whom Frank supervised and inspected in compliance with FINRA rules.

Frank played it safe and made 43 road trips across the country to personally inspect each of his registered representatives’ remote workplaces.

During a routine examination, FINRA learned that four registered representatives in North Carolina, South Carolina, New York, and Ohio worked remotely. The agency claimed Frank had insufficient proof he visited each office, accused him of fraud, slapped him and SEI with a $243,000 fine, and permanently banned Frank from working in the financial industry.

In FINRA’s eyes, Frank’s failure to keep a few gas station and hotel receipts as evidence he made remote office visits is punishable with a quarter-million-dollar fine and the corporate “death penalty” of a lifetime industry ban.

Frank never had a fair chance to defend himself, though. Instead of a courthouse, FINRA prosecuted Frank in its own house, first with a hearing before FINRA employees from the Office of Hearing Officers (OHO), which issued the fine and lifetime ban.

Following standard FINRA procedure, Frank appealed to another trio of FINRA employees from within the agency’s National Adjudicatory Council (NAC). The NAC reduced the fine by $70,000 but upheld the earlier decision and Frank’s lifetime ban. Frank continued to follow agency procedure and appealed to the SEC, where his case languished, unresolved, for more than four years.

The lifetime ban imposed on Frank went into effect in May 2019. Frank has not worked, nor can he, in the financial industry—his livelihood for five decades—in any capacity that requires an active registration with FINRA and SEC.

Frank did nothing wrong, but he’s been denied his day in a real court for years. Our constitutional structure does not permit unaccountable private actors to wield governmental power. FINRA has only minimal oversight from an independent federal agency. Therefore, it must not issue and enforce rules that have the force and effect of federal law. Additionally, none of FINRA’s board members and hearing officers is appointed by the president or any executive officers, as the Constitution requires when such significant government power is involved.

Absent meaningful constitutional guardrails, unaccountable private organizations are empowered to do whatever they want to whomever they want with no consequences to themselves and no recourse for the prosecuted.

Represented in federal court at no charge by Pacific Legal Foundation, Frank is challenging the illegal regulatory scheme that outsources congressional lawmaking, judicial adjudication, and executive enforcement powers to a quasi-governmental organization to restore his due process rights, his livelihood, and the proper balance of power in government.

After Frank filed his lawsuit in federal court, the SEC finally issued an opinion on his case—almost five years after Frank initially appealed. The SEC rejected FINRA’s theory of the case and lifted the lifetime ban that had been imposed on Frank. Even so—in a Kafkaesque twist—the SEC sent the case back to FINRA for a third time to readjudicate his rights—only prolonging this already near-decade-long ordeal.

Frank is still challenging the unfair process and the fine on his company and has appealed the SEC’s decision to the Fourth Circuit Court of Appeals to vindicate his constitutional rights.

Pacific Legal Foundation knows securing Americans’ rights means ending unjust regulatory tribunals that plague America’s administrative state and destroy lives and livelihoods. Through litigation and legislative reform, PLF is fighting to return the adjudicative process to where it belongs: real, constitutional courts. Frank and SEI are among a growing list of courageous citizens to join PLF’s initiative to end agency adjudication.